Rental markets in Australia have taken a beating from COVID-19, with rents and yields falling in inner city areas, CoreLogic research showed.
Prior to the pandemic in 2019, rental markets were tightening as the levels of property investment and development had reduced, impacting rental supply, according to the firm’s head of research Eliza Owen.
But the rental market has shifted gears thanks to COVID-19. The most significant factors to the changing market are:
- Closed international borders, pushing down rental demand from new migrants.
- Job and income losses in sectors where workers are more likely to rent.
- Added stock as holiday homes are converted to long-term rental accommodation due to the collapse of the travel market.
Which rental markets have been affected by COVID-19?
Suburbs in Sydney, Melbourne and Hobart have been most affected by the nosedive in rents. Out of the top 20 capital city suburbs which have seen the biggest drops, 10 were in Sydney, while Melbourne and Hobart each had five suburbs on the list.
Properties in inner Sydney and inner Melbourne areas have seen the biggest drop in rents.
Rental values in Sydney’s Haymarket suffered the most significant decline nationally, plunging by 7.2 per cent in the three months to June, according to CoreLogic. This was followed by Barangaroo and Melbourne’s Southbank, both seeing rental drops of 7 per cent.
Rents in both the Sydney and Melbourne CBDs dipped by 6.9 per cent.
In Sydney, the median weekly dwelling rent declined by 1.3 per cent to $525 in the three months to June 2020. Weekly unit rents in particular fell by 2.1 per cent in the same period to $525.
Dwelling rents in Melbourne edged down by 1 per cent to $440, with units dropping by 2 per cent to $440 a week.
The median weekly rent across the combined capitals was $460, down 0.7 per cent.
“Investors should note that inner-city unit markets pose a particular risk in the current environment, with rental values likely to fall alongside property values,” Ms Owen wrote in the ANZ-CoreLogic Housing Affordability report.
Gross rental yields are also plummeting in Sydney and Melbourne, where it has fallen by 0.6 per cent and 0.5 per cent respectively in the 12 months to June 2020.
Across the combined capitals, yields have declined by 0.5 per cent in the same period.
How lower levels of rental property supply could hold up rents
As rents fall amid an uncertain economy and jobs market, investor demand for real estate has dwindled. New investor mortgage activity is at its lowest since January 2019, figures from the Australian Bureau of Statistics (ABS) showed.
The monthly value of investor housing finance commitments dived by 15.6 per cent to $4.2 billion in May 2020. And investor mortgage commitments as a percentage of total housing finance commitments tumbled to 25 per cent in May 2020 from 32 per cent in May 2018.
With less new supply on the rental market, rental market conditions could hold up if the number of investors in the property market remain low.
“Before the onset of the pandemic in Australia, investor participation in the housing market was at its lowest since 2001,” Ms Owen wrote.
“If sustained, this suggests that the decline in demand for rentals could be partially offset by a decline in the supply of rental property.”
Rental listings are already decreasing gradually across the combined capitals. Total rental listings fell by 0.3 per cent when comparing the four weeks to March 15 with the four weeks to June 28, according to CoreLogic. New rent listings dropped by 3.8 per cent when looking at the same periods.
However, in Sydney and Melbourne, supply is on the rise. Melbourne led the hike with rent listings up by 3,730, and Sydney’s listings jumped by 1,043.
It should be noted that the data was released before the new stage four lockdowns in Victoria were announced in early August.
What investors should know in a falling rental market
Many everyday Australians invest in the property market using their life savings to build and retain wealth. Rental market conditions are expected to “directly influence investor demand over the next few years, which could affect both prices and construction”, according to Ms Owen.
But property investors may be less affected during the slump if they:
- are in the market for the long haul and are ready to hold;
- have a healthy amount of equity in their property; and
- have a stable income.
If your tenant has been asking for rent reductions, or if your property is in an area hit by the downturn, you may run the risk of falling into mortgage stress. It may be worth considering refinancing your mortgage to reduce your repayments and improve your cash flow.
But refinancing may not be an option for everyone. If you don’t have enough equity built up in your property, or if you’ve deferred your mortgage, you may not be in a position to refinance.
Another option is to approach your lender and ask for a rate reduction. Given the generally low interest rates across the board, it’s possible your lender may consider discounting your rate.
Lowest ongoing variable rates on RateCity.com.au
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